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Apr 26, 2018, 09:00am

Three Things For Consumers To Know When Choosing A Crypto Service Provider

2017 provided rapid growth and opportunity for new businesses offering digital currency retirement plans. But with the rise of new businesses also comes the rise of bad actors, and for novice consumers navigating a relatively unregulated industry, it can be difficult to know whom to trust. As the COO for an industry-leading company in the space, and as an advocate for the consumer, I wanted to provide three suggestions to consider if you’re looking into investing cryptocurrencies in your IRA or 401(k).

Opt for an offline digital cold storage wallet.

There are three different methods for storing a cryptocurrency investment. The first -- and preferred -- is a cold storage offline wallet, the second is a hardware physical wallet, and the third is a hot storage wallet.

Offline digital wallets provide premier recovery options and advanced multisignature encryption technology and are the most secure way to store a long-term cryptocurrency investment. However, other competitors in the space use hardware wallets and hot storage wallets, which are problematic for a variety of reasons.

Hardware wallets, which are physical thumb drive devices that are programmed by the user and include a 24 phrase paper key as a recovery option, pose a number of security threats. First, there is the issue of the paper key that holds your password. If you lose the paper, your funds are gone. Secondly, a thumb drive, in the scheme of things, is quite fragile. Think of it like a DNA sample in a glass bottle at a forensics lab. If there is an earthquake and a bunch of bottles break and DNA samples are mixed together, any potential evidence is lost. The same concept applies to hardware wallets: If they break, your investment is gone.

Furthermore, some companies that use hardware wallets provide misleading marketing around insurance protection. Lengthy disclaimers can reveal, upon closer look, that companies only provide insurance for the hardware device itself rather than the investments contained within. What does this mean? A company that claims “full-insurance” may only be insuring a $75 device rather than an investment worth thousands or even millions of dollars.

But that’s not all to look out for. Other companies in the cryptocurrency retirement sector use hot storage wallets, which are also a cause for concern. Hot wallets are connected to the internet, which makes them much more appealing to hackers. Some are single-signature and some are multisignature, but all wallets in this category are designed for speed and not security and are not the right fit for those looking to make a long-term investment in their IRA or 401(k).

As a prospective customer in the cryptocurrency retirement sector, it’s crucial consumers not be swayed by misleading marketing. When evaluating cryptocurrency retirement investment plans, be sure to advocate for precise, even written answers detailing what level of protection each company can provide.

Use a custodian-controlled model.

In regards to custodian offerings for cryptocurrency investments, there are currently only two configurations available. The first is a custodian-controlled model, in which a self-directed IRA company creates an IRA account capable of holding digital currency. In this more secure scenario, the company retains ownership of the customer’s keys and securities. It reduces the likelihood that investments could be lost or stolen, and it keeps tax-deferred assets the proper distance from personal assets, as the government intended.

However, some self-directed IRA companies will help the customer create a single member LLC to be owned by the custodian, appointing the customer as the manager of his or her own assets. This is problematic because there is a lack of beneficiary protocols, and it raises the risk of personal storage keys being compromised, lost, stolen or damaged. Prospective customers looking at different custodianship workflows may consider avoiding the LLC option.

Work with a U.S.-based company.

For peace of mind, work with a U.S.-based company that has a highly responsive customer service team. Investing in cryptocurrency is complicated, and you want to be sure that you’re working with a company that is compliant with the most up-to-date industry regulations and only a phone call away if you have questions that need to be addressed.

Regulation In The Crypto Space: The Bigger Picture

Cryptocurrencies have experienced a meteoric rise, and with that, the government has arrived to regulate technology companies. While the regulatory infrastructure has not been wholly legislated, federal financial services regulators have entered the scene and, by all accounts, appear to be ready to take on the job of regulating the new financial services technologies.

Recently, the SEC announced that cryptocurrency exchanges might be shut down unless they register with the SEC, and the CFTC has announced it will also be regulating certain cryptocurrency exchanges. Even the largest online advertisers, like Facebook and Google, announced they would either be banning cryptocurrency ads or undergoing a much more thorough vetting process. Ultimately, these changes will empower consumers to more easily be able to weed out the bad actors and, in turn, work with legitimate and trusted cryptocurrency companies that can help them reach their financial goals.